Industrial Production 2009-10 Update

IIP for Mar-10 was at 13.5% (y-o-y) lower than market expectations of 14.9% (Newswire 18, y-o-y). The figure for February was unchanged at 15.1%.

In Mar-10 the index is at 347.3, the highest in the time series since 1993-94. Though industrial activity has been picking up leading to rise in index, it is also because of year end. On an average, between February and Mar- the index rises by around 10-11%. However, it rose by 9% between Feb10 and Mar-10. The market analysts had expected growth between February-10 and Mar-10 to be around 10%, which results in a 14.9% year on year growth.

Sector-wise growth: All the three sectors viz. mining, manufacturing and electricity grew at a faster rate in Mar-10 compared to Mar-09 (Table 1). The average growth rate in the three sectors is higher in 2009-10 compared to 2008-09.

Table 1: Sector-wise growth (YoY, in %)

Mar- 09

Mar- 10

2008-09

2009-10

Mining

1.9

11.0

2.6

9.7

Manufacturing

-0.3

14.3

2.9

10.8

Electricity

6.3

7.7

2.7

6.0

IIP Overall

0.3

13.5

2.8

10.3

Source: Central Statistical Organization

The growth rates for 2009-10 are remarkable considering the sharp decline because of the global recession that started in September 2008. The industry started recovering post May 09 and it has been a strong V shaped recovery. The growth is not just because of base effect but the indices have increased as well. If we see the growth rate in IIP in last six years (Table 2), it is the second highest growth rate. It is an outstanding recovery and few could have projected this quick recovery in the beginning of 2009-10.

Table 2: IIP Growth Rate (YoY, in %)

2004-05

8.4%

2005-06

8.0%

2006-07

11.5%

2007-08

8.6%

2008-09

2.8%

2009-10

10.3%

Source: Central Statistical Organization

Use Based Classification: The sector-wise goods in IIP are also classified on the basis of their usage.

Basic goods: Includes different kinds of fuels like diesel and kerosene, basic metals like iron and steel, basic chemicals like soda and different kinds of acids.

Capital goods: Different kinds of machinery used in production like textiles machinery, boilers and furnaces and transport equipments like locomotives.

Intermediate goods: Used in final production of various items. Cotton yarn, auto ancillary & parts, TV picture tubes are examples.

In use-based classification, except for consumer non-durables all sectors have grown at a faster pace in 2009-10 compared to 2008-09 (Table 3 ).

Table 3: Use based classification growth (yoy, in %)

Mar- 09

Mar- 10

2008-09

2009-10

Basic Goods

1.9

10.1

2.7

7.1

Capital Goods

-6.3

27.4

8.3

17.8

Intermediate Goods

1.9

12.7

-1.9

13.8

Consumer Goods

1.3

10.6

5.1

7.3

of which

Consumer Durables

8.4

32.0

4.5

26.3

Consumer Non- Durables

-1.0

3.3

5.4

1.4

Source: Central Statistical Organization

Growth in capital goods for Mar-10 is at 27.4%. Since September 2009, growth in capital goods has been in double digits. In Jan’10 it was at a record high of 55.4%. The growth in capital goods is not because of base-effect. Capital Goods Index has surged from 400-440 level in previous months to 648.1 in Mar- 10. The capital goods index is at its highest level in the time series. Capital goods include items like machinery and equipments. An increase in production of these items shows the other industries are also expecting increase in demand for their goods.

Another important thing to note is growth in consumer durables. It continues to remain very high. It has been in double digits since Apr’ 09. In the first half of the year, growth in consumer durables was because of festival season, government policies like NREGA, Sixth pay Commission etc. However, the growth continues to surge despite despite the absence of first half events. This could be because of pick up in economic activity which has led to increase in incomes.

Manufacturing Sector: It constitutes nearly 80% of the IIP Index. Hence, further analysis of Manufacturing Sector is important.

In Mar-10 we see decline in 3 industries – Jute products, Textile products and Wool & man made fibre textiles. There was sharp decline in Jute industry in January and February because of strike in jute manufacturing units. As a result index had dipped from 103 in Dec’09 to 9.8 in Jan’10. The strike has stopped now and index has increased to 109.3 levels.

In nine industries we see growth rate in double digits and in remaining four the growth is above 4%.

The growth rate of Transport Equipment and Parts which includes automobiles has declined but continues to grow in double digits. It registered a growth rate of 38.8% in Nov’ 09, 82.2% in Dec’ 09 56.2% in Jan’ 10, 36.3% in Feb 10 and 23% in Mar-10. Some of the items included in Transport Equipment and Parts also form a part of the consumer durables sector like passenger cars, motor cycles, bicycles etc. The automobile industry has been showing strong sales growth from November onwards because of festival season and policy stimulus. So, we can see the linkage and high growth is seen in both Transport Equipment and Parts and consumer durables sector.

Machinery Equipment and Parts includes things like Boilers, Furnaces, Industrial machinery etc. The growth has declined but it also remains in double digits. It has grown in double digits from Jun-09 onwards. Most of the items included in this sector also form a part of the capital goods sector. So, we can see the linkage and double digit growth is seen in both Machinery Equipment and Parts and capital goods sector.

The comparison of growth rates between 2009-10 and 2008-09 gives a better picture. Out of the seventeen industries, seven show double digit growth rates in 2009-10. No sector showed double digit growth rates in 2008-09. Only two sectors show negative numbers in 2009-10 compared to seven sectors in 2008-09.

Table 4: Manufacturing Sector

Mar-10

2008-09

2009-10

Food Products

26.2%

-1.2%

-6.0%

Beverages, Tobacco and related Products

4.0%

1.5%

15.8%

Cotton Textiles

7.3%

5.6%

-1.8%

Wool, silk and man made fibre textiles

-3.9%

8.8%

0.6%

Jute and other vegetable fibre textiles

-9.6%

-21.5%

-9.7%

Textile products

-5.4%

8.1%

6.2%

Wood and Furniture

21.6%

10.9%

-11.0%

Paper and printing

6.1%

4.0%

1.9%

Leather and leather and fur products

11.7%

2.6%

-6.7%

Basic Chemicals & Chemical Products

4.8%

11.2%

3.7%

Rubber, Plastic, Petroleum and Coal Products

14.6%

15.4%

-1.4%

Non-Metallic Mineral Products

5.8%

7.6%

1.3%

Basic Metal and Alloy Industries

15.8%

6.5%

4.0%

Metal Products and Parts

42.8%

15.9%

-3.3%

Machinery and Equipment

22.1%

20.8%

8.6%

Transport Equipment and Parts

23.0%

26.2%

2.8%

Other Manufacturing Industries

40.1%

11.4%

0.9%

Source: Central Statistical Organization

SummaryOverall, it has been quite a journey for IIP growth in 2009-10. In the beginning of the year, most analysts had predicted a far lower growth than the final figure of 10.3%. From May 2009 onwards, growth started picking up and the growth trajectory has surprised all. A significant rise is seen in the overall index level and is at its highest level in the time series. There were concerns initially that IIP Index was still volatile on a month on month basis. But the index has continued to increase since November 09 and is at its highest in the time-series starting from 1993-94.
Till now, much of the growth was because of the large base effect. The sub-sector indices declined sharply post the global crisis leading to double-digit growth rates. This is not the case from Jan’09 onwards. The Capital goods index is at its highest and consumer durables index continues to show robust growth. Moreover, actual growth in consumer durable could be higher as items like DVD players and digital cameras are not included in the index. The other indices also remain at their near-highest levels. The growth is clearly becoming more robust and broad based.

In its advanced estimates, CSO estimated industrial growth for 2009-10 at 8.8%. In 2009-10, IIP growth is much higher at 10.3%. Hence, there are expectations that final GDP growth numbers for 2009-10 could be higher than 7.2%. Despite strong recovery, concerns still remain for 2010-11. The concerns have re-emerged once again in global economy because of increases in European sovereign risks. The industrial growth declined because of increase in global risks in September 2008 and as the global risks rise again, industrial production may not rise on expected lines.